Private Banking: Banks Lose Ground to Nonbanks In Business of Serving

Bank units serving the wealthy may be losing ground rapidly to nonbank rivals.

Payment Systems Inc., Tampa, found that banks last year collected only 24% of the money that affluent people spent on financial services - down from 34% in 1993.

The bank units suffered declines not only in market share but also in absolute revenues. Fees and interest paid to the units dropped by more than 13% last year, to $14.9 billion, Payment Systems found.

The drops are worrisome because banks have been viewing the affluent as one of their greatest hopes for revenue and profit growth. With baby boomers aging and accumulating wealth, banks have been targeting them for a range of financial services.

"Those numbers ought to ring a fire alarm bell for the CEO, because it is concrete evidence that banks are losing massive market share in the most lucrative market they have," said David Ross Palmer, a private banking and trust consultant in New York.

Payment Systems based its conclusions on a yearly survey of approximately 2,000 households that rate among the top fifth in income and assets. The respondents pulled in at least $75,000 a year of annual income, or had at least $300,000 of assets, not including houses.

Respondents were asked to describe their lending, checking, savings, trust, financial advisory, and investing relationships. While the surveys are conducted in the summer, the latest results were only recently disclosed to people who are not among the firm's clients.

Over the years, banks' share of financial services spending by affluent households has gone up and down, as markets have made bank deposits more or less profitable, and banks' lending has grown and shrunk.

But John J. DeMarco, a senior vice president of Payment Systems, said last year's decline was especially troubling.

For example, only 45% of the survey respondents who used personal or private banking services last year said a banker had tried to cross-sell them more services.

In 1993, 55% of the respondents said a banker tried to cross-sell them. In both years, more than a quarter of those contacted for cross-selling said they bought more personal and private banking services.

This means that one of the major reasons banks lost market share was that they didn't try as hard to drum up more business from current clients.

Significantly, the proportion of affluent households using private or personal banking services remained constant at 29%.

The decline in cross selling "is the major reason why banks' share of revenue has gone down," Mr. DeMarco said.

Mr. DeMarco and Mr. Palmer added that while banks became less aggressive marketers, brokers - banks' principal competition - continued to push hard.

Indeed, last year brokerage firms increased their share of the affluent's spending on financial services to 38% from 31%.

Mr. DeMarco added that he would have expected banks to fare better last year, since bond and stock markets sank relative to bank deposits.

Most of the decline at personal and private banking units came from households rated among the wealthy elite, with an average of $1.2 million of assets to invest. In this segment, private banks' so-called share-of- wallet fell from to 47% from 67%.

Payment Systems did not single out banking companies that lost market share. But some bankers contacted by this newspaper said their units fared well.

He credited a new focus on asset allocation, risk management, and advisory services.

Michael M. Cassell, chief executive of Putnam Trust Co. Greenwich, Conn., said his institution also fared well. Based in an enclave of the superrich, the company has nearly $700 million of bank assets, and more than $2 billion of trust assets.

Mr. Cassell said a renewed focus on relationship banking helped trust and private banking revenues grow "in the high single digits" on a percentage basis.

But he said he wouldn't be surprised if other institutions fared poorly.

"Some banks are focused and doing well," he said. "And some are searching and haven't figured out how to do it yet."

14-Day Free Trial

The increasing adoption of virtual card payments by accounts payable departments has created an unex­pected complication for suppliers: more friction in the processing, posting and reconciliation of payments and receivables. The root of the problem is that most suppliers rely on a manual approach to processing e-mailed virtual card payments. Suppliers are forced to balance their organization’s need for operational efficiency and control with rising customer demand to pay with a virtual card. But a new breed of tech­nology enables suppliers to process virtual card payments straight-through, addressing the needs of buyers and suppliers. This paper details the growth of electronic business-to-business (B2B) payments, shows how manual approaches to processing virtual card payments cause friction in accounts receivables, describes a way to process virtual card payments straight-through, and highlights the benefits of friction­less payments.